beginners corner

Calculating Covered Call Writing & Cash-Secured Put Trades for the Same Stock and Similar Moneyness

click ↑ 4 Featured

Should I write a covered call or sell a cash-secured put on an elite-performing stock or ETF? I use both but slightly favor covered call writing. Both have worked quite well for me over the past (nearly) 3 decades. On 11/16/2023, I thought it would be instructive to select a stock from our premium watch list and calculate initial covered call writing and cash-secured put returns. I (randomly) chose Pinterest, Inc. (NYSE: PINS) and used 2 strikes out-of-the-money (OTM) from current market value at the time of the trades.

PINS Option Chain on 11/16/2023 for the 12/15/2023 expiration

  • PINS is trading at $31.60 on 11/16/2023
  • OTM call strike ($33.00) and put strike ($30.00) will be evaluated. Both are 2 strikes from current market value
  • Red circles show more than adequate option liquidity (open interest)
  • Bid prices are $0.61 (brown cell) for the $33.00 call and $0.44 (green cell) for the $30.00 put

PINS: Covered call writing initial calculations using the BCI Trade Management Calculator (TMC)

  • The 30-day return (if taken through contract expiration) is 1.93%, 23.49% annualized (brown cells)
  • The breakeven price point is $30.99 (yellow cell)
  • Upside potential if PINS moves up to or beyond the $33.00 strike is 4.43% (green cell), creating a maximum 30-day return of 6.36% (without exit strategy intervention)

PINS: Cash-secured put initial calculations

  • The 30-day return (if taken through contract expiration) is 1.49%,18.11% annualized (brown cells)
  • The breakeven price point is $29.56 (yellow cell)
  • If exercised, PINS will be purchased at the breakeven price point, a discount of 6.46% (green cell) from the price when the trade was executed (without exit strategy intervention)

Discussion

Both strategies offered reasonable 1-month and annualized returns. Returns were slightly higher for covered call writing, which also offered significant upside potential. Cash-secured put initial returns were also significant and offered greater protection to the downside with a lower breakeven price point. Both are solid initial trades, with covered call writing being more aggressive and put-selling more defensive.



Covered Call Writing Online Video Course with Downloadable Workbook

Click here for more information.

Our objective was to create the most complete and comprehensive video program on covered call writing found anywhere. The 4-set video curriculum takes us through the 3 required skills: stock selection, option selection, and position management. The fourth section highlights special circumstances like writing calls against long-term buy-and-hold portfolios.

You Will Learn:
– How to locate the greatest performing stocks for option-selling
– Which Is the best option to sell
– How To calculate your returns
– How To utilize exit strategies – Decrease losses & enhance gains

The program is based on 25 years of actual trading options, not on computer models. All the rules and guidelines presented are based on these real-life experiences. This series will benefit both beginners and more experienced investors and addresses all scenarios that can arise before, during and after trade executions.

Click here for more information.


Your generous testimonials

Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:

Alan, 

Thank you for lifting the fog around options trading.

Your books, spreadsheets and YouTube tutorials are amazingly educational, and you are delivering real value to the options community in refining their engagement and trading process. 

Regards

Bevan

Upcoming events

1. BCI-Only Webinar

Thursday April 11, 2024

8 PM ET – 9:30 PM ET

Ultra Low-Risk Approaches to Covered call Writing and Selling Cash-Secured Puts

Adding Delta and Implied Volatility to existing defensive concepts

Covered call writing and selling cash-secured puts are low-risk, option-selling strategies focused on generating cash-flow. Our trades can be structured to represent aggressive or defensive postures or somewhere in between.

This presentation will detail how to structure our trades to decrease risk, particularly in bear and volatile market conditions while still generating significant returns. It will also be of interest to investors who have a low personal risk-tolerance but still want to generate higher than risk-free returns.

Both Delta (an option Greek) and implied volatility will be spotlighted and real-life examples will be utilized to demonstrate the process of establishing these conservative trades, while still allowing us the potential to generate significant annualized returns.

Free registration information to follow.

All questions related to covered call writing and cash-secured puts will be answered in real time after the webinar presentation.

2. Stock Traders Expo- live event in Orlando Florida

October 17 -20

Details to follow.

3. Coming Soon From BCI…

· The Blue Collar Investor Conservative Credit Spread Trading System

· We Are Introducing Our Credit Spread Trading Methodology Following BCI Conservative Trading Principles

· The System Includes:

o Bull Put Calculator

o Bear Call Calculator

o Expected Price Movement Calculator – That Will help To Determine High Probability Short Leg and Long Leg Positions of The Credit Spread

o An Extensive Credit Spread Trading Journal

· A New Approach to User Guides…Detailed Context Specific Cell Descriptions and Guidelines…For Both Data Entry and Calculated Results

If you are interested in learning more or want early access to our new system, please send an email to Barry Bergman at:

[email protected]

Alan speaking at a Money Show event********************************************************************************************************************

10 Responses to “Calculating Covered Call Writing & Cash-Secured Put Trades for the Same Stock and Similar Moneyness”

  1. Stuart March 16, 2024 4:00 am #

    Alan,

    Do you ever place a stop loss order on your covered call trades to sell shares when the price is going down?

    Thanks and love your work.

    Stuart

    • Alan Ellman March 16, 2024 7:13 am #

      Stuart,

      In our covered call trades, there are 2 legs, long stock and short call.

      The long stock (we own the shares) protects the short call contract obligation, because we know our cost basis, so we can’t sell our shares and still retain the risk of the short call. Brokers won’t even permit this for most retail investors unless given this high-risk level of approval.

      However, we must always place a “stop loss” on the option side, using our 20%/10% guidelines. This where we buy back the short call when the option value reaches a certain price threshold.

      If the short call is closed, we can then evaluate our trade for next steps based on our exit strategy arsenal opportunities.

      Bottom line: In our covered call trades, the “stop loss” is placed on the option side.

      Alan

  2. Irwin March 16, 2024 6:39 pm #

    Alan,

    I heard you speak in Las Vegas recently and you mentioned that you use both weekly and monthly options.

    If annualized returns are greater for weeklys, why would we use monthly options? What am I missing?

    Thank you.

    Irwin

    • Alan Ellman March 17, 2024 7:25 am #

      Irwin,

      Both weekly and monthly expirations can be significantly successful. There are pros & cons to both.

      You have identified one of the advantages of weekly options … the potential for greater annualized returns. Another is avoiding weekend risk. There are more.

      Monthly expirations also have advantages, greater liquidity, a larger pool of securities to choose from and more time for exit strategy execution, to name a few.

      Bottom line: Both work and I, personally, use both weekly and monthly expirations for both calls and puts, slightly favoring monthly expirations.

      Alan

  3. Barry B March 16, 2024 9:17 pm #

    Premium Members,

    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 03/15/24.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

    https://www.youtube.com/user/BlueCollarInvestor

    Reminder: Premium Member’s pricing is locked into your current rate and will never see a rate increase as long as the membership remains active.

    Best,

    Barry and The Blue Collar Investor Team

  4. Lou March 17, 2024 2:45 am #

    Alan,

    I was looking over the stock report that came out last night and noticed that 2 of my stocks are still listed as eligible but are no longer in bold.

    Does this mean we should use in the money strikes for protection or is it okay to use out of the money strikes?

    Thanks,
    Lou (loving this stuff!)

    • Alan Ellman March 18, 2024 5:03 am #

      Lou,

      Last week, the market was down 0.13%. This impacted the technical parameters of our stocks, causing some to go from “bold” (all bullish) to “mixed”.

      Most of our eligible stocks from the recent report showed mixed technical indicators. The “moneyness” (OTM or ITM) of our strikes is mostly based on our overall market assessment and our personal risk-tolerance.

      If we are bullish moving forward, we favor OTM calls; if bearish, ITM strikes.

      For me, I’m still leaning bullish and will up set up my (multiple) option portfolios, today, favoring OTM strikes 2-to-1 over ITM strikes.

      Alan

  5. Art March 20, 2024 7:59 am #

    Hi Alan,

    Is there a way to measure the risk in a covered call trade? I understand that these strategies are low risk, but how much risk?

    Appreciate any comments.

    Art

    • Alan Ellman March 20, 2024 2:48 pm #

      Art,

      The degree of risk we are incurring is directly related to the implied volatility of the underlying securities.

      We, actually, do not need to look up IV stats because the IV is directly related to our premium % returns.

      For example, a 1-month initial time-value return of 8% equates to a high IV (risk) security. An initial 1-month return of 2%, means a much lower IV (risk) stock or ETF.

      I set my monthly initial time-value return goal range between 2% – 4%. This will allow me to be structure low-risk trades that meet my pre-stated time-value goals.

      For those with lower personal risk-tolerance, set your range lower; and vice-versa.

      Alan

  6. Alan Ellman March 20, 2024 4:46 pm #

    Premium members:

    This week’s 4-page report of top-performing ETFs has been uploaded to your premium site. The Select Sector SPDR section is now crafted to align with our streamlined (CEO) approach to covered call writing. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.

    Premium member video link:

    https://youtu.be/EXMO-KwZuJs

    For your convenience, here is the link to login to the premium site:

    https://www.thebluecollarinvestor.com/member/login.php

    NOT A PREMIUM MEMBER? Check out this link:

    https://www.thebluecollarinvestor.com/membership.shtml

    Alan and the BCI team

Leave a Reply

Optionally add an image (JPEG only)